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WisdomTree’s DXJ Gets Export Tilt

WisdomTree makes what amounts to a yen-weakening bet by tweaking its Japan fund’s DXJ’s index.

WisdomTree is tinkering with the index that underlies the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) to increase the fund’s exposure to firms that capture much of their revenue stream from export sales.

The new tilt toward heavy exporters, effective after the close on Nov. 30, reflects the firm’s growing belief that a pro-quantitative-easing Prime Minister Shinzo Abe might be elected in the next few weeks. He aims to end what have been two-plus decades of deflation policies exacerbated by the strength of the yen.

Indeed, the Japanese yen has already started to lose ground against the U.S. dollar—a trend that is beneficial to Japanese exporting companies. But DXJ’s portfolio currently has among its top holdings names that derive all of their revenues from Japan.

The move is predicated on a body of data suggesting that a weaker yen is quite positive for Japan’s huge export sector. DXJ insulates investors from yen movements, but gives investors pure access to thriving sales of Japanese firms.

The new “geographic revenue filter”—designed to remove from the index companies that generate most of their revenues from Japan, is an interesting nod to the notion that even passive investing is affected by active insight. DXJ does indeed track a rules-based WisdomTree index, but the firm is now changing the rules based on its perception of the market.

“We believe Japan-based multinational companies that generate the bulk of their revenues from markets outside of Japan are more likely to benefit from a weakening yen,” WisdomTree’s Jeremy Schwartz said in a research note.

“We reviewed the index holdings for the WisdomTree Japan Hedged Equity Index and believe the current, unadjusted dividend-weighted methodology is overly exposed to companies whose revenues are generated within Japan, and under exposure to Japanese multinationals,” he said.

Firms that derive more than 80 percent of their revenues from Japan will now be excluded from the mix.

The New Portfolio

Individual securities will be capped at 5 percent and sectors at 25 percent, for risk management purposes.

Under the new methodology, Mitsubishi UFJ Financial Group will become the largest portfolio holding, representing 5 percent of the mix, up from a 3 percent weighting previously. Some 71 percent of the firm’s revenues are generated in Japan.

Takeda and Canon will now be No. 2 and No. 3 holdings, with weighting of 5 percent and 4.5 percent, respectively, up from 2.6 percent and 2.1 percent previously. In all, revenue generated from Japan for the top 10 holdings will average 41 percent, down from 73 percent under the current methodology.

DXJ’s top holdings will also show equity returns that have greater negative correlation to the yen, Schwartz said in the note.

Bumped from the top are NTT DOCOMO and Nippon Telegraph & Telephone Corp., two names that generate all of their revenues from Japanese saless.